Allow local authorities more freedom - let our LAs build!

“The Government must build 300,000 homes each year in England to help solve the housing crisis, an increase of 50pc from its current target”, a committee of Lords has advised. Well the number needed keeps getting bigger because year on year there is a shortage of homes delivered – basically housing is still a key industry to the UK economy. The committee also recognises that it is the public sector not private sector that will deliver the increase, though I would argue it is also smaller developers doing <25 home developments.

Two key points to me are:

1. Current government policy includes the changes to stamp duty in April 2016 and also the cuts to social rent. Both of these have had an adverse effect – an effectively the latter hits the poorest hard.
2. The current restrictions on local authorities in relation to how much they can borrow is odd! Why can a local authority borrow money to build a park (which brings in no income) rather than a house which can be sold and reinvested.

Building homes is a risky business and it is understandable that house builders want to manage that risk by building homes in a safe environment to ensure sales which as a result means certain house builders hold large volumes of land directly or under option. There has been talk of councils imposing fines on house builders who do not develop, though this potential can have negative implications, i.e. land is simply only bought at the point it is needed – that could completely change how the model works, and who knows what that would result in, but when over 50% of homes are built by 8 house builders it is clear we have headed towards an oligopoly.

The Government set a target of one million new homes built by the end of this Parliament, meaning 200,000 homes per year. It has been ten years since that many houses were built in one year; in 2015, 142,890 houses were completed. The Lords’ target of 300,000 is higher even than the consensus of what experts deemed would be necessary.

So to solve the problem of not only building houses but also building houses for those that need them you remove the restrictions on local authorities, allow them to create “housing arms” which can either work with the private sector or simply work alone to bring forward regeneration of land within their city. This has the benefits of rejuvenating stale parts of the city. It can help improve authorities invest in apprenticeships linking to local schools to train people, thus helping towards skill shortages and to top it all off a local authority will be far more inclined to build affordable social housing.

Feel free to contact me 0113 288 2276 or lee.a.wilkinson@uk.pwc.com if you wish to discuss this blog or anything relevant to property and construction.

Enjoy your weekend

Lee

Now is the time to build a million homes

You may have heard that some of the biggest losers in the stock market turmoil at the moment are Britain’s housebuilders. Those who have rode the wave of the “UK housing crisis” have been pinpointed by nervous shareholders with Persimmon and Barratts, to only name two, been hit with double digit falls. But step back and ask is this really warranted?

The building industry has always been one of the first hit due to its acute sensitivity to market sentiment and the apparent fragility of model they all operate which relies on the high demand for their product – in economic uncertainty there is a nervousness that people will still spend and therefore off the shopping list goes the house. Now forgive me if I’m naïve but I thought we had a supply issue in the UK and therefore I would have thought demand would be in place for a while – irrespective of whether or not the market takes a wobble or tumble, people still need somewhere to live. Though one area is just potential impact is the ability to generate similar levels of profit.

House prices have soared in recent years and for once not just in London, though this year to date has seen a level of stagnation and no doubt a decline is currently ongoing. The housebuilders responded well to the last recession by rebuilding balance sheets and repaying both debt and shareholders as a thank you for their support but now with a large supply of land resting on balance sheets either directly or indirectly via options it raises a question around how profitable they can be and ultimately will they continue to buy.

That house prices may fall is not in itself a bad thing: many people, including myself, have been willing this for quite some time. House prices have been racing away from wages for much too long now, benefiting existing homeowners at the expense of future generations, and a correction is well overdue.

The difficulty is what comes next, which by now we know well: housebuilding output will fall as developers turn off the taps. This has been the construction cycle that has repeated over and over since the 1970s. Builders only build on any scale in a rising market. As soon as demand falls, and prices drop, build-out rates plummet while developers wait for confidence (meaning: prices) to return. The long-run trajectory of house prices is only ever upwards.

The big housebuilders will have to reset their expectations of future price growth and probably take a hit on the landbanks they have already built. This will be hard on them, but no investment is risk free and the public interest must come first.

The public sector homes could be either made available for social housing, and the building costs recouped over the coming decades in rent. A cheaper, and therefore more politically palatable approach, could be to sell them into owner-occupation, with most of the costs recouped immediately and reinvested year after year.

The government has a lot to contemplate right now. A housebuilding programme should not be seen as peripheral to the challenge of the coming months, but central to it.

Feel free to contact me 0113 288 2276 or lee.a.wilkinson@uk.pwc.com if you wish to discuss this blog or anything relevant to property and construction.

Enjoy your weekend

Lee

Food for thought for a post EU construction world

In a weekend that saw some good reasons to smile – Murray, Watson, Reid and Whiley showed the world that the UK has a strong tennis core coupled with Hamilton bringing home glory on the track. The only dampener was Portugal showing the world that you can under impress in football and still win!  

The future of the country is now defined (or not as the case maybe). The UK has decided to leave the European Union but what that means is still very much unclear – we’re not even sure who will be leading the conversations to determine our “settlement” package. The world has not ended yet and as such all the suggestions of bad and good really have no consequence.

Construction, well the majority, has never really been a fan of Brexit. Whether a consultant or a contractor they were reliant on skilled (and I mean skilled) EU labour to fill the gap left by our own poor investment in talent and aging population but it is more than simply just labour:

·        So it is highly likely the EU will leave the single market therefore ending the freedom of movement. According to the government 12% of the construction industry workers comes from aboard, largely the EU. Recently it was estimated that we would need to train 224,000 to meet the shortfall. So what happens next – well wages rise (yes that is a good thing) as the lack of labour is fought over;

·        In terms of the materials used in construction – well the pound has fallen and given a significant amount of materials are purchased from the EU it is expected there will be a longer term increase in materials. So that will be a double whammy.

·        The investment in the construction sector is expected to drop and therefore has been a few isolated instances of this already occurring, for example Standard Life. Now I say isolated as at present the whole sector is unsure – have prices fallen? Who knows because the market isn’t really being tested at the moment and we’re now into summer break so it maybe the Autumn before we know for sure. What I do know is there is a lot of activity behind the scenes on hold – the question is will it ever materialise or vanish into the ether. There are certainly some who see this as an opportunity to invest in the UK.

·        We had lived and hoped of zero carbon homes by 2016 until they were scrapped in the Housing and Planning bill – this in turn was driven by EU Directive requiring all buildings to be nearly zero energy by December 2020. Now its unsure what we’ll do with the regulation, but Leadsom seemed to be supportive so it may still stick around.

So the impact on the industry could come in many forms – positive or negative. It is clear what the overall industry view is but now is the time to look to the future and work out what does the industry want to be its legacy and how can it shape some of the above for the benefit of the future.

Feel free to contact me 0113 288 2276 or lee.a.wilkinson@uk.pwc.com if you wish to discuss this blog or anything relevant to property and construction.

Enjoy your week

Lee